NCUA sues Morgan Stanley over sale of $566 million in mortgage-backed securities

By Danielle DouglasAugust 30, 2013

The National Credit Union Administration said Friday it has sued Morgan Stanley for misrepresenting the quality of the residential mortgages tucked into the securities the bank sold to two now-defunct credit unions.

The lawsuit by the regulatory agency, filed Aug. 16, is the latest in a series of civil cases it has brought against investment banks, including Goldman Sachs and Barclays, for saddling credit unions with millions of dollars in troubled loans that led to their demise.

Selling mortgage securities was a brisk business for Wall Street for many years. Banks, after issuing loans, would pool hundreds of mortgages together and market the bundles as investments that could be traded just like stocks.

Morgan Stanley and its affiliates are being accused of misleading U.S. Central Federal Credit Union, based in Lenexa, Kan., and Western Corporate Federal Credit Union, based in San Damas, Calif., about the risks associated with more than $566 million worth of mortgage securities.

The NCUA claims the bank made false statements about the underwriting standards used to originate the home loan securities that were sold between 2006 and 2007.

“The originators systematically abandoned the stated underwriting guidelines in the offering documents,” according to the complaint. “The securities were destined from inception to perform poorly.”

As a result, both credit unions sustained hundreds of millions of dollars in losses as the housing market melted down, according to the complaint. U.S. Central and WesCorp became insolvent and were subsequently placed into conservatorship and liquidated.

“Firms like Morgan Stanley sold securities that turned out to be faulty, triggering a crisis in the credit union industry that has been extremely expensive to contain and repair,” Debbie Matz, chairman of the NCUA, said in a statement.

Officials at Morgan Stanley declined to comment on the case. The firm has been sued by several investors and regulators, including the Federal Housing Finance Agency, for the sale of its residential mortgage-backed securities.

The NCUA said the amount of civil penalties will be determined as the litigation proceeds. Any amount recovered from the lawsuit will be used to replenish a industry-financed stabilization fund.

In its role as receiver for failed credit unions, the NCUA has filed 11 lawsuits since 2008 against Wall Street firms to recover losses from residential mortgage-backed securities investments. The agency has settled claims collectively worth more than $335 million with Citigroup, HSBC, Bank of America and Deutsche Bank.

The NCUA, like the Federal Deposit Insurance Corp., has been waging legal battles against firms, directors and officers that it says had a hand in the failure of credit unions. To date, the agency has had to dole out $3.5 billion from the stabilization fund to protect the industry following the collapse of five corporate credit unions and specialized institutions that provide products and services to the entire credit-union system.